Telmex: Toothless Regulation That Fleeces Mexican and U.S. Consumers. The telecommunications sector presents what is probably the best case study of the distorting impact of monopolies on the Mexican economy, in this case the de facto monopoly controlled by Grupo Carso, the privately held firm owned by Mexican billionaire Carlos Slim and his family. Through his ownership of the former state-owned monopoly Teléfonos de México (Telmex), which had been Mexico's "Ma Bell," Slim owns more than 90 percent of Mexico's fixed telephone landlines, and "[h] is America Movil's Telcel unit has 77 percent of wireless subscribers in the country."
Compare that to the United States, where four well-regulated national cell phone carriers compete ferociously and drive down prices paid by consumers. Telmex and Telcel dominate the telecom industry and wield "significant influence over key regulatory and government decision makers." Telmex has often been accused of finding innovative ways to block the entry of competitors. As Mary Anastasia O'Grady has noted in The Wall Street Journal, "Mr. Slim's company has been masterful in protecting its turf. One example is its success in using endless litigation to fend off regulatory orders that it provide interconnections to other carriers at fair rates, as required by law."
"Mexico lacks a competition culture," according to the Paris-based Organisation for Economic Co-operation and Development (OECD). "The Federal Competition Commission is fairly toothless," says The Economist, "though a new law is supposed to give it more bite. Some analysts are hoping that technological innovation will undermine Telmex's monopoly. But it is seeking to expand into new businesses, such as cable television."
In 1999, the U.S. Federal Communications Commission accused Telmex (and then-partner Sprint) of "anticompetitive practices in the long-distance market" by overcharging Mexicans in the U.S. when they called home to Mexico. "U.S. consumers have to pay much more than they should to reach friends and relatives in Mexico," said then-FCC Chairman William E. Kennard. "The carriers have not moved quickly enough to bring these rates down and ensure meaningful competition." The U.S. government complained about the Telmex practices to the World Trade Organization, which ruled against Telmex in 2002.
Critics complain that Slim's competitors have been "victimized" by his cynical "manipulation of Mexico's weak regulatory agencies and arcane laws," especially his notorious abuse of the amparo, or injunction, which allows any citizen who feels that a government decision violates his constitutional rights to ask a judge to delay its implementation—often for years.
Since 1998, Slim has made use of more than 60 amparos to thwart decisions by Mexico's antitrust agency, the Comisión Federal de Competencia, ordering Telmex to reduce its interconnection rates—the fees rivals must pay to use Telmex trunk lines. "Telmex's very aggressive use of the amparo has ended any hope of an open telecommunications market in Mexico," says Karina Duyich, [former head of] AT&T Mexico's legal department.
Carlos Slim: Mexico's Fattest Cat. Perhaps the wealthiest person on the planet, Mexican telecommunications mogul Carlos Slim has been chastised for his lack of charity. Slim, whose father immigrated to Mexico from Lebanon, controls companies that account for one-third of the investment value of the $400 billion Mexican Bolsa (stock exchange).
Slim, 68, amassed his nearly $60 billion fortune in a nation where per capita income is less than $6,800 a year and half the population lives in poverty. His wealth amounts to 6.3 percent of Mexico's annual economic output: If Bill Gates owned a similar chunk of the U.S., he would be worth $784 billion. According to one account:
[I]t takes about nine of the captains of industry and finance of the 19th century and early 20th centuries—Rockefeller, Cornelius Vanderbilt, John J. Astor, Andrew Carnegie, Alexander Stewart, Frederick Weyerhaeuser, Jay Gould and Marshall Field—to replicate the footprint that Mr. Slim has left on Mexico.
As another observer has written, that's "enough to give any populist heartburn."
The cash from Telmex has financed relentless diversification. Slim's America Movil is the largest mobile-phone operator in Latin America. His family also holds a string of industrial and retailing businesses, including the Mexican operations of Sears. He is the biggest tenant in the country's shopping centers. His latest venture is Ideal, an infrastructure company working mainly in the oil industry. He is also the second-largest shareholder in Televisa, Mexico's television giant. In addition to landlines and cellular, Telmex also enjoys an important share of the broadband Internet market and is trying to become a dominant force in Mexico's pay-TV market. Telmex also has huge business holdings in the U.S. as well as in other South American countries.
Professor George W. Grayson, an expert on Mexico at the College of William and Mary, coined the term "Slimlandia" to describe how entrenched the Slim family's companies are in the daily lives of Mexicans. It is not a reverential term. Many Mexicans hoped that privatization, which began in the early 1990s, would create competition and drive prices down drastically, but that has not happened. "Slim is one of a dozen fat cats in Mexico who impede that country's growth because they run monopolies or oligopolies," says Grayson. "The Mexican economy is highly inefficient, and it is losing its competitive standing vis-à-vis other countries because of people like Slim."
Telmex Privatization: A Sweetheart Deal. As a recent report by the OECD Economics Department notes, "Mexico remains one of the OECD countries with the highest charges, especially for business use. In the mobile telephone market, in particular, the dominant firm [Telmex] is using its market power to squeeze out other players." Clearly, the many customers who are being held hostage to both Telmex and Telcel are not getting their money's worth for the high prices they pay. The government of then-President Carlos Salinas de Gortari did very little to reform or modernize Telmex when it was privatized in 1990 during the Mexican government's preparations for entry into NAFTA. The Salinas administration simply issued regulations that protected the Telmex long-distance service monopoly until August 1996.
In participation with minority partners France Telecom and Southwestern Bell (now AT&T), Slim acquired a 51 percent voting interest in Telmex, representing over 20 percent of the equity in the company. Although he denies accusations that Salinas gave him special treatment, Slim was able to buy Telmex from the government for just $1.7 billion.
Rumors about the details of the Telmex purchase have swirled ever since then. Slim was a member of Salinas's inner circle and attended a legendary 1993 dinner at which Salinas purportedly asked each guest to contribute $25 million to his PRI party's war chest in return for favorable treatment during the coming wave of privatizations. "Although no evidence has emerged, many Mexicans suspect that Mr. Salinas secretly profited from the sale of Telmex."
Telmex service was terrible in 1995 when Slim took over. Although service improved after he "plowed more than $16 billion into the carrier to upgrade infrastructure and improve customer service," Carlos Slim continues to abuse his monopoly position, overcharging both Mexicans at home and those in the U.S. trying to call home.
Poor Telmex service is one of the leading complaints received by Profeco, Mexico's Federal Consumer Protection Agency. Under pressure in part from increased competition from such long-distance Internet phone service providers as Skype and Vonage,Telmex has publicized the fact that it has not raised rates for basic landline service for eight years, which has hurt profit margins but blunts political efforts to break up the company. Meanwhile, Skype and Vonage have alleged that Telmex has attempted to block their service to Mexico.
Teledensity (the number oflandlines per capita, close to 100 percent in the U.S.) in Mexico, at 19 percent, is among the lowest in Latin America because of the artificially high prices that Telmex charges and the lack of competition. This low level of interconnectedness is another major factor holding back Mexico's development.
Telmex owns and operates international businesses including fixed-line and wireless operators, television cable companies, and Internet service providers in Brazil, Argentina, Chile, Colombia, Ecuador, and Peru. These businesses account for about 30 percent of Telmex's total revenue. In 1995, government regulators allowed Telmex to buy a 49 percent stake in Cablevision, the cable-television division of Mexico's media powerhouse, Televisa. Telmex has been criticized by competitors and legislators for using its influence to head off stronger regulation. Analysts say the problem is Mexico's weak regulatory framework.
Reforms to curtail Telmex's monopoly power during the Ernesto Zedillo and Vicente Fox administrations (1994 to 2006) yielded modest reforms at best. As recently as October 2007, an OECD report concluded that Mexico must do more to increase competition in its energy and telecommunications industries. Additionally, "OECD noted that telephone costs in Mexico are among the highest among OECD member countries in terms of purchasing power parity." Clearly, Mexicans would be well served by increased consumer choice and a more robust and transparent telecommunications sector.
In October 2007, Mexico's Federal Competition Commission (CFC) began an investigation of Carlos Slim for alleged monopoly practices, trying "to determine whether the two companies, owned by Slim, America Movil and Telmex have a monopoly on the Mexican market."
Splitting up Telmex Would Create Jobs. BreakingTelmex's vise-like grip on Mexico's telecommunications sector would create new, sustainable, well-paying jobs for Mexicans in Mexico. A recent paper by two prominent World Bank scholars, Isabel Guerrero and Luis Felipe Lopez-Calva, underscores this point:
Many studies confirm that lack of competition is a crucial problem holding back the possibility of strong growth in Mexico. The Mexican Competitiveness Institute (IMCO) developed a model to assess the main factors behind the low and failing competitiveness [in] Mexico. Drawing on cross-country information, they estimated point elasticities for the impact of investment per worker of a ten percent [sic] in different dependent variables. The top four interventions which would bring about an improvement in competitiveness in Mexico are: (i) improvements in the competition environment; (ii) changes in taxes and tax regulations; (iii) improvements in administrative regulations and the investment climate; and (iv) education.
An Inefficient, State-Owned Electricity Monopoly. Mexico's national sovereignty sensitivities historically have extended beyond the oil patch to embrace the entire energy sector, which Mexicans have considered strategic. During the nationalistic "import substitution" craze that swept through Latin America in the 1960s, the Mexican government chose to nationalize the country's electricity production and distribution companies, imposing limitations on private participation and foreign companies' ability to operate. They are permitted to do so only through specific service contracts with the Federal Electricity Commission (CFE) and Luz y Fuerza del Centro (LFC).
The electricity sector is federally owned, with the CFE having exclusive rights to provide electric services throughout Mexico. The CFE is one of Mexico's largest companies. According to the Economist Intelligence Unit:
[Its monopoly status is] embedded in the Mexican constitution and is defined by its Electricity Law. CFE is vertically integrated and provides generation, transmission and distribution services for all of Mexico with the exception of electric distribution in the Mexico City metropolitan area. Luz y Fuerza del Centro (LFC), another wholly owned decentralized agency of the Mexican government, is responsible for the distribution of electricity in Mexico City and purchases some of its power from CFE.
Past attempts at reform have been met with strong political and social resistance in Mexico, where electricity subsidies for residential consumers absorb substantial fiscal resources. Meanwhile, Mexico's power generation sector is failing to install sufficient additional power generation to meet future needs. Historically, political constraints have meant that any funding to increase generating ability had to come from the already overextended federal budget. Nevertheless, a recent report by the Mexican energy ministry shows that between 2009 and 2014, a substantial amount of new generating capacity will have to come from private investment in order to meet demand.
A good illustration of Mexico's highly politicized energy regulatory environment occurred in 2004 when leftists in Congress, who oppose even the slightest degree of energy privatization, filed a complaint with the Auditoría Superior de la Federaçion (ASF), asking it to review the legality of those few generation permits that had been granted by the Comisión Reguladora de Energá (CRE) to private parties. The ASF found that the generation permits granted by the CRE were illegal and contrary to the constitution. The energy ministry filed a constitutional challenge before the supreme court alleging that the ASF does not have authority to decide on the legality of the generation permits granted to private parties by the CRE, and the supreme court agreed to hear the case, thereby tying up the permits for lengthy periods of litigation.
President Zedillo, a Yale-trained economist, proposed a complex set of reforms in 1999 that would have led to the sale of the CFE and LFC, but the Congress killed the reforms. "An electricityreform package that would have strengthened the legal framework and facilitate growth in privateinvestment was proposed by the Fox administration," according to the Economist Intelligence Unit, "but was blocked. The Calderón administration hopes to push a similar project through [in 2008] ."
Increasing private participation in the electricity sector would also help Mexico to do a better job of controlling air pollution, for which Mexico City is justly infamous. According to a study by the International Energy Agency, Mexico is one of the 10 worst polluters among developing countries. Generally, only countries with a high degree of economic freedom and market-based democracy have the means to spend the large sums required to clean the air.
Other Obstacles to Reform
Mexico's Plutocracy. For any of its reform measures to succeed, the Mexican government must dismantle the country's corporatist system of price supports, subsidies, and special-interest tax exemptions. This system has evolved over many years in an incestuous atmosphere of collusion among senior government, labor, and business elites.
Among the primary systemic failures of Mexico's current political arrangement is the control that key economic actors in the private sector exercise over the country's legislative and executive bodies. In effect, Mexico is governed by a permanent and unelected plutocracy. The wealth of the country is concentrated in the hands of too few individuals.
Failure to Protect Intellectual Property Rights. If the monopolies can be reined in, not only will domestic competitors benefit, but so will foreign competitors. There is another problem, however, that is impeding foreign investors.
In order for Mexico to attract additional foreign direct investment (most notably in telecommunications and energy), it must strengthen enforcement mechanisms to protect intellectual property rights. By placing Mexico on its Special 301 Watch List in 2007 for the third year in a row, the Office of the United States Trade Representative (USTR) rebuked the Mexican government for its weak enforcement of intellectual property rights.
Inadequate Highways and Other Infrastructure Problems. As noted by the OECD, the competitiveness of Mexican firms is being hampered by the poor quality and high cost of transportation, which are also disincentives to foreign investment and to Mexico's productivity growth:
The road network and trucking are plagued by inefficiencies and there are border issues that need to be addressed. The government is committed to further developing road infrastructure through public-private partnerships and concessions for toll roads. Clarifying long term government plans would help private sector involvement.
Additional detail is provided by the Economist Intelligence Unit:
Mexico's road network stood at 355,796 km in 2005, including 122,677 km of paved roads and 14,874 km of major road systems. Poor coordination at the state and federal level has resulted in poor planning of the road network [in the 1990s] and in maintenance problems. Mexico's roads and highways are still inadequate in the more remote parts of the country…. It continues to prove difficult to attract private capital to road building, maintenance and operation; in addition, government auctions for road concessions are complicated.
Subsidies. Although President Calderón is trying to reform the energy sector, these reforms are doomed to fail unless he is able first to address the excessive government subsidies for that sector. According to a 2007 study by the International Association for Energy Economics, electricity prices in Mexico are "heavily and unevenly subsidized"— the average electricity subsidy is 30 percent of non-discounted retail rates, and residential subsidies are more than 50 percent. To offset the cost of the subsidies, excessively high energy prices are charged to those businesses and consumers that do not receive subsidies, and those high rates are "hurting the competitive position of Mexican industries."
These subsidies are also hurting the government's budget, frittering away resources that could be used more productively to improve infrastructure. "In 2007," reports the Financial Times, "the Mexican federal government…earmarked 105.6 billion pesos to subsidize power consumption, which is equal to 1.1 percent of Mexico's gross domestic product (GDP)."
Mexico's Political Oligopoly. For 70 years, just one party—the PRI—had a complete lock on Mexican politics. Now three parties share the power, but no fourth party can enter the political arena or have access to the taxpayer subsidies handed out to these three (to the tune of more than half a billion dollars in 2007) without their consent.
Independent candidates are not allowed to run. The absence of consecutive re-election at any level reinforces the party machines' power: They pick candidates to run for all local and state offices who are then merely ratified by the voters at the polls. The only primaries or conventions that are held are to determine candidates at the national level.
Political Reforms Blocked. Last year, President Calderón won approval from Congress for a package of fiscal reform measures intended to increase non-oil tax revenue by 2 percent of Mexico's GDP. Its approval gives the president political momentum as he seeks the energy reform that is next on his agenda in 2008. But this victory came at a price: The president was forced "to acquiesce in an opposition-inspired constitutional amendment on electoral reform" that is "the legacy of last year's bitter presidential election, in which Mr. Calderón narrowly defeated Andrés Manuel López Obrador of the center-left Party of the Democratic Revolution (PRD)."
Does Mexico Need a Teddy Roosevelt?
In the late 19th and early 20th centuries, the United States faced similar challenges. President Theodore Roosevelt pressured Congress to implement existing anti-trust legislation (e.g., the Sherman Anti-Trust Act of 1890) and to pass additional measures, such as the law that created the Interstate Commerce Commission. By doing so, Roosevelt led the U.S. government to stand courageously against powerful banking, oil, and steel magnates of the day and enforce regulations and laws to curb the power of monopolies to choke off competition and hamper free-market operations.
Although President Roosevelt's name is most often associated with trust-busting in the U.S., his successor, William Howard Taft, broke up twice as many trusts during his tenure. Rather than encouraging unnecessary and burdensome regulations, Roosevelt and Taft used governmental powers in the manner envisioned by the Founders to create a space where competition could provide American consumers with the best goods and services at the lowest price.
The head of Mexico's Federal Competition Commission, Eduardo Perez Motta, recently announced that his agency (the equivalent of the Anti-Trust Division in the U.S. Department of Justice) will re-open an investigation of Carlos Slim's telephone companies, Telefonos de Mexico and America Movil. Slim's empire today is far greater than even John D. Rockefeller's at the time of his death in 1937. If President Calderón can be Mexico's Teddy Roosevelt, perhaps Mr. Perez Motta can become Mexico's President Taft.
Calderón himself is on record as supporting the changes that he knows are needed: "As the head of Mexico's energy sector [2003–2006] , he promoted the modernization of state-owned companies as president of the Board of Directors of PEMEX, the Federal Commission of Electricity (CFE) and the electricity company Luz y Fuerza del Centro (LyFC)."
A Transformed Mexico Would Help Everyone
The prosperity and national security of the United States have already been enhanced by the progress made by Mexico since it joined NAFTA in 1994. For further progress, however, the barriers to entry into the marketplace of political ideas also have to come down.
What is required is a careful examination of the vast areas of Mexico's economy that are state-owned or where private monopolies and duopolies are permitted by the state to operate without competition. Attention must also be given to labor laws that hobble the indigenous workforce and force millions into the informal economy, as well as to the political straightjacket that has bound Mexico's leadership. These reforms will require a level of political will by all Mexican politicians that is strong enough to break these shackles and create an atmosphere that fosters greater economic opportunity.
This would, of course, be a daunting task at every level, perhaps even a dangerous one. But it is not impossible. The result would be a transformed Mexico—a Mexico that has never before existed, that attracts workers with its economic opportunities rather than repelling them. The pressure on the U.S. border would ease considerably and might even disappear.
With strong personal leadership that inspires the Mexican population, a coalition with the political will to persist just might be forged. President Calderón, were he to succeed, would be hailed as the Teddy Roosevelt of Mexico, and Mexico and the United States would both be the better for it.
What Needs to Be Done
The Mexican government should open its nationalized oil, natural gas, and electricity sectors to private investment and participation. Pemex, for instance, should consider leasing deep-water areas under its control in the Gulf of Mexico to private oil companies to develop the fields, sell the oil produced, and pay royalties from their profits to the Mexican government. Private electricity-generating companies in Mexico and the U.S. should be encouraged to sell power to the two state-owned companies, the Federal Electricity Commission and Central Power and Light, and to invest in building additional power-generating ability in Mexico.
The Mexican government should break up private-sector monopolies and duopolies by passage, implementation, and enforcement of more effective anti-trust legislation.
The Mexican government should enforce its laws more aggressively to protect all intellectual property rights, for Mexican as well as for foreign rights holders, by increasing funding and staffing of the three relevant government agencies (the Office of the Attorney General, the Mexican Institute of Industrial Property; and the National Institute of Author Rights). The government should also increase training for Mexican police and the Mexican Customs Service to spot IPR violations and take enforcement actions.
The Mexican government should eliminate the distortionary price controls and subsidies that have tilted the competitive playing field toward monopolies and duopolies in numerous sectors of the economy, especially in telecommunications, airlines, banking, broadcasting, and food production. These changes would encourage foreign direct investment in all sectors, especially energy, banking, and telecommunications, and the lower prices from increased competition would benefit Mexican consumers.
The Mexican government should implement a substantial, multi-year infrastructure improvement programwith dramatically increased public and private funding of infrastructure development projects (e.g., privately owned toll roads),beginning with passage by the Mexican Congress of the ambitious infrastructure program recently proposed by President Calderón.
The Bush Administration, through the U.S. Department of Justice, should investigate the operations of Mexican monopolies in the United States, especially in the telecommunications, transportation, and energy sectors. The Justice Department should produce a report for the President that identifies those monopolies and lays out any actions that the U.S. government can take to encourage these companies to support the creation of viable domestic and foreign competitors within their economic sectors in Mexico.
The Bush Administration, through the U.S. Department of the Treasury, should commission a study by an independent private consultant to determine the level of remittances in all forms that are sent to Mexico from migrants in the U.S.
The Bush Administration should negotiate with the government of Mexico to design new co-funded assistance programs focused on intensive infrastructural, developmental, and technical assistance in those areas within Mexico that are the major sources of immigration to the United States.
The Bush Administration should negotiate with the Mexican government to design new assistance programs in conjunction with leading U.S information technology and adult-education companies with the goal of improving educational opportunities in Mexico through greater access to technology and information resources. Private U.S. companies should provide the bulk of funding for the projects in return for access to the Mexican market, to be negotiated with the Mexican government. James M. Roberts is Research Fellow for Economic Freedom and Growth in the Center for International Trade and Economics (CITE), and Israel Ortega is a Senior Media Services Associate in the Media Services Department, at The Heritage Foundation. CITE Research Assistant Caroline Walsh made many valuable contributions to this paper.